Financial Statements - Cash Flow Statement Basics

Statement of Cash Flow
The statement of cash flow reports the impact of a firm's operating, investing and financial activities on cash flows over an accounting period. The cash flow statement is designed to convert the accrual basis of accounting used in the income statement and balance sheet back to a cash basis.

The cash flow statement will reveal the following to analysts:

How the company obtains and spends cash

Why there may be differences between net income and cash flows

If the company generates enough cash from operation to sustain the business

If the company generates enough cash to pay off existing debts as they mature

If the company has enough cash to take advantage of new investment opportunities

Segregation of Cash FlowsThe statement of cash flows is segregated into three sections:

Operating activities

Investing activities

Financing activities

1. Cash Flow from Operating Activities (CFO)CFO is cash flow that arises from normal operations such as revenues and cash operating expenses net of taxes.

This includes:

Cash inflow (+)

Revenue from sale of goods and services

Interest (from debt instruments of other entities)

Dividends (from equities of other entities)

Cash outflow (-)

Payments to suppliers

Payments to employees

Payments to government

Payments to lenders

Payments for other expenses

2. Cash Flow from Investing Activities (CFI)CFI is cash flow that arises from investment activities such as the acquisition or disposition of current and fixed assets.

This includes:

Cash inflow (+)

Sale of property, plant and equipment

Sale of debt or equity securities (other entities)

Collection of principal on loans to other entities

Cash outflow (-)

Purchase of property, plant and equipment

Purchase of debt or equity securities (other entities)

Lending to other entities

3. Cash flow from financing activities (CFF)CFF is cash flow that arises from raising (or decreasing) cash through the issuance (or retraction) of additional shares, short-term or long-term debt for the company's operations. This includes:

Cash inflow (+)

Sale of equity securities

Issuance of debt securities

Cash outflow (-)

Dividends to shareholders

Redemption of long-term debt

Redemption of capital stock

Reporting Noncash Investing and Financing TransactionsInformation for the preparation of the statement of cash flows is derived from three sources:

Comparative balance sheets

Current income statements

Selected transaction data (footnotes)

Some investing and financing activities do not flow through the statement of cash flow because they do not require the use of cash.

Examples Include:

Conversion of debt to equity

Conversion of preferred equity to common equity

Acquisition of assets through capital leases

Acquisition of long-term assets by issuing notes payable

Acquisition of non-cash assets (patents, licenses) in exchange for shares or debt securities

Though these items are typically not included in the statement of cash flow, they can be found as footnotes to the financial statements.